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Governments must develop exit strategies, BIS warns

Alice Fletcher

06 Aug 2009

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In a report published on July 28 entitled An assessment of financial sector rescue programmes, the Basel-based BIS said rescue packages introduced in late 2008 and early 2009 had reduced the risk of default of banks and had helped stabilise the financial system.

However, the agency noted there were dangers in prolonged intervention. In particular, the BIS argued, the stabilising effect of rescue programmes comes at the cost of distortions within the financial system, with weak banks from strong countries accessing cheaper funding than strong banks from weak countries.

The report also blamed the lack of a credible, quick-to-implement exit strategy for hampering the revival of non-guaranteed funding and private-sector investment, and for encouraging banks to devise their future policies on the assumption of continued government support.

"Rescue programmes may be de facto subsidising large and complex financial institutions, which may be less likely to use the funds raised to increase lending to the real economy," it claimed.

The report identified the revitalisation of the securitisation market as essential if governments are to successfully withdraw their financial support without adverse consequences for banks. These are the same ideas that were behind the launch of the Term Asset-Backed Securities Loan Facility in the US in March. The programme was set up with the intention of reviving the securitisation markets by providing financing to investors, but firms have been slow to make use of the facility. So far, only $29.7 billion has been requested out of the $200 billion made available.

The BIS committee, however, is not discouraged. "A key ingredient for success," it insists, "is the resumption of the market for securitisation, which has represented a very important source of funding for banks until it dried up because of the financial crisis."